Too many small businesses do not differentiate between selling to businesses and selling to consumers. They assume that there are no differences as to how organisations and the public buy goods and services. The failure to take account of organisational buying behaviour leads to many small businesses assuming that selling to large organisations is too difficult and they concentrate solely on consumer segments.
I have discussed the four Ansoff market growth strategies several times in this blog. Ansoff prioritises market penetration as the easiest strategy to grow your presence in the market; that is selling more of your existing products to your target market segments. Ansoff then argues that once there are no more opportunities for market penetration, the next least risky strategy is one of market expansion; selling your existing products to new markets. Market expansion could mean expanding your sales geographically but another perfectly plausible strategy is to sell your existing products and services to organisations.
However, business and organisational markets segment differently to consumer markets. This difference is driven by the nature of organisational buying behaviour.
Consumers often make purchases on the spur of the moment. They often take the decision to purchase as individuals. Organisations tend to have structured buying procedures which are followed for the majority of purchases. The bigger the cost and the risk of the purchase, the more likely that strict purchasing processes will be followed.
It is rare for organisational purchases to be made by an individual. There will be a group of people behind an organisational purchase. Where a group of people are involved in a purchase, there will be formal and informal power dynamics.
Marketers call those in an organisation involved in a purchase a Decision-making Unit (DMU). Within a DMU there are six main roles:
- Initiator: This individual identifies the issue that must be overcome by the decision to purchase a product or service. When I worked in Trading Standards this was one of my roles. I was responsible for the maintenance, calibration and replacement of the services metrological and testing equipment. I also had to procure the services of test laboratories for formal and informal samples of food, consumer products and fuels. With regard to the purchase of equipment, which could cost thousands of pounds, I may have identified the need to purchase, but I could not make that purchase on my own volition. I had to refer the purchase to a group of senior managers.
- User: This is the person who will actually use the product or service after it is purchased. This could be the initiator or it could be other members of staff. For example, an IT manager may identify the need for new copywriting software but it will be the firms marketers who will use that software. Many organisations have implemented quality assurance systems such as Kaizen. A feature of such systems is that staff, through suggestion boxes or quality circles identify where processes could be improved. In such systems process improvement may mean the purchase and design of new equipment. So in such circumstances, the user will also be the initiator.
- Buyer: Many organisations will employ a professional buyer to purchase everything from office equipment, IT systems to raw materials and production equipment. Often large organisations have central purchasing units who carry out the vast majority of purchases in bulk and from a central location such as a head office. Professional buyers will negotiate the best price for bulk purchases and they will work from detailed technical briefs. These technical briefs will be created by other members of the decision-making unit.
- Influencer: The influencer is a member of the decision making unit who does not directly make the decision to purchase or the decision as to which supplier to use; but they have a major impact on the decision. This could be an employee of the organisation who has expert knowledge. So the health and safety manager of a firm may influence the decision to buy machinery by advising the DMU of the law with regard to safety requirements and compliance with legislation such as the Electricity at Work Regulations.
- Decider: This is the person who actually makes the decision to purchase. This could be a senior manager such as a firms managing director or in many cases, the finance director. The greater the importance of the purchase, the more a senior figure in a firm will be involved with it.
- Gatekeeper: These individuals determine the flow of information that reaches the decision-making unit. Secretaries, executive assistants and PAs often act as a gatekeeper to their busiy bosses. Technical managers may have a preference for one supplier over another, e.g. an IT manager may prefer Apple products over those of Microsoft.
The size and make up of the decision-making unit will depend on the size and nature of purchase. If a company is buying new production line robots, the DMU will be significantly larger than the decision to buy a photocopier.
Organisational purchases can be classified in terms of their level of risk:
- Routine Order Products: These items are bought on a regular basis and are unlikely to cause performance problems regarding their use.
- Procedural Problem Products: These products will require some level of staff training for their use. There may be some resistance to these products as staff resent the change to their daily life.
- Performance Problem Products: There are risks that the product or service purchased will not meet users’ requirements. This issue often occurs with the implementation of new technology.
- Political Problem Products: Such issues occur where a purchase takes resources from one area of an organisation and gives them to another part of the organisation. So if a business makes a high value investment in IT and that purchase takes budget from the sales team. These purchase decisions will likely cause political strife within an organisation. They can lead to accusations of empire building and arguments about status between managers.
Members of a decision-making unit will often act in their own self interest as well as in the interest of the organisation. Self interest can get in the way of the aims of an organisation. Such issues can develop when there are different incentives for different parts of an organisation. So if an investment means that the sales team may receive lower commission rates, there may be resistance to it.
Local authority purchasing displays all the characteristics of organisational buying behaviour but there are additional considerations. Many local authorities employ central purchasing units and have expert influencers on purchasing decisions.
Local authorities, by law, must follow best value protocols. The definition of Best Value is often confused with a requirement to accept the lowest bid; particularly in these times of austerity where local government budgets are squeezed.
Best value does not mean a focus on the lowest bid. Higher bids may be accepted if they offer more in terms of functionality. So if a laptop computer is more expensive, but it has more memory and better pre-loaded apps, that may be better value to the authority than the cheaper equivalent product.
Best value protocols require local authorities to obtain multiple contract bids for products and services. There will nearly always a competitive bidding process. The need to obtain competitive bids can be ignored only if there are exceptional reasons for doing so.
For example, one of my roles as a TSO was to obtain the services of expert witnesses and test laboratories. If I believed that a particular expert or laboratory could provide exceptional value, I could ignore competitive bidding. I often did this where a product neeed to be tested and I knew that evidence for a criminal trial would require a particular expert opinion. I often preferred one laboratory because I knew that the court evidence would be provided by the chair of the appropriate British Standards Institution panel.
For large scale of expensive local authority purchases, it will be the case that the decision to purchase will be taken out of the hands of managers and would be taken by a committee of councillors or even a full council vote. In such circumstances purchasing decisions can become fractious with opinions falling along party lines or even splitting between political groups within the ruling administration.
When entering organisational and B2B markets it is critical that you do your homework. You need to carefully examine bid specifications. You need to research the decision-making unit within the organisation and target your marketing activity on those group members who have the most influence on the decision to purchase. You also need to work hard to get your promotional effort past gatekeepers.